CDS on Turkey and Japan Continue to Climb, WE SovX Close to Breakout

Below is our customary collection updates of the usual suspects: CDS spreads, bond yields, euro basis swaps and several other charts. Both charts and price scales are color coded (readers should keep the different scales in mind when assessing 4-in-1 charts). CDS prices are as of Monday's close.

Following the Merkel-Sarkozy meeting, not much has changed – the markets remain unsettled, as uncertainty over the euro area's future continues to dominate the proceedings. The one market that did get pushed around a bit upon Merkel's post meeting remarks was the Greek government debt market. The 2 year Greek note yield shot up by nearly 20% to continue its recent vertical ascent – it now stands at over 176%.

Notably, CDS on France and Japan continue to rise as well. Japan looks increasingly like it could transmogrify from its current 'gray swan' status to a widely unexpected left-of-field event that complicates the global debt crisis even further.

Something also continues to unsettle traders about Turkey. CDS on Turkey are climbing rapidly, but curiously, its bond yields have not joined in – at least not yet.

The Markit SovX is perilously close to breaking out to a new high. If it does, then a new, more intense phase of the euro area crisis will be underway.

5 year CDS on France, Belgium, Ireland and Japan – at nearly 153 basis points, CDS on Japan are at a new high. In absolute terms, this spread is still low, but consider that 10 year JGB's yield less than one percent – so in reality the CDS are trading at an uncommonly high level – click for better resolution.

5 year CDS on Bulgaria, Croatia, Hungary and Austria – small pullbacks, but these charts look rather bullish to us – click for better resolution.

5 year CDS on Germany, the US and the Markit SovX index of CDS on 19 Western European sovereigns. The SovX is only a tiny bit below its all time high now. A breakout would herald a new, even more intense phase of the crisis – click for better resolution.

5 year CDS on Bahrain, Saudi Arabia, Morocco and Turkey – CDS on Turkey continue to race higher. Curiously, interest rates on its government bonds have not yet broken out (see further below) – click for better resolution.

Three month, one year, three year and five year euro basis swaps – the recovery remains intact – click for better resolution.

10 year government bond yields of Italy, Greece, Portugal and Spain. Italy's yields are perilously close to breaking out to new highs – click for better resolution.

The 9-year Irish government bond yield, the 2 year Greek note yield, and the yield on UK gilts and the Austrian 10 year government bond. The yield on the Greek 2 year note rose by nearly 20% following the press conference of Merkel and Sarkozy. The decisive point was a remark that seemed to indicate that Greece could be forced out of the euro area if its debt exchange negotiations fail – as it would then no longer be eligible for receiving further bailout funds – click for better resolution.

10 year government bond yield of Turkey – this yield is not reflecting the move in the CDS spread yet – click for better resolution.

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2 Responses to “Credit Markets Chart Update, Jan. 10”

With rates in Japan this low, what else could the CDS’s be hedging? Would it be wrong to believe they might be hedging a collapse of the yen? I can’t see where this would be the case other than the idea the CDS is in dollars and the exchange rate is locked in. Thus, one could hold JGB and hedge currency risk and hope for currency appreciation? This would be a bet that the yen appreciates at a pace to make up for cost of the CDS. Thus the JGB yield minus the CDS minus the US carry interest would produce an absolute figure less than the appreciation of the yen. Otherwise, I can see a hedge in the works or a reason the JGB rates don’t reflect the market determined risk.

Also, how long is it going to be before the IMF has bailed out everyone, including its backers? Looks like nothing is going to be left after the bankers are done.

One can hedge currency risK directly (and cheaply), so I don’t think this is the thinking behind this. I think what the spread reflects is growing fear that Japan won’t be able to swing it any longer, as tax revenues as a percentage of expenditure have hit a new low. People are piling into yen and JGB’s as a ‘safe haven’ mainly because of the market’s size – similar to US treasuries, the size of the market makes it easy for money fleeing from the euro area to park itself there. The players driving up the CDS spread may not be the same ones.

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